On Fiat-Chrysler’s Merger Proposal to Renault: Too Broad?

 As Renault was considering Fiat Chrysler’s proposal to merge, industry executives and analysts believed “that carmakers must link up to share the cost of a transition from internal combustion engines to avoid being run over by fast-moving tech industry challengers like Tesla or Uber.”[1] To be sure, (b)y purchasing parts together, combining their manufacturing operations and sharing the cost of research and development,” the merger could “eventually save 5 billion euros per year,” according to Fiat.[2] The R & D would include funds spent on developing new models as well as on high tech oriented to the future. Although significant efficiency could be achieved due to under-used factories and all the money going into product development, the basic problem was one of insufficient scale (i.e., revenue) to support (i.e., finance) the very costly research and development needed on electric and/or self-diving cars. In its statement, Fiat Chrysler pointed to “the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry in areas like connectivity, electrification, and autonomous driving.”[3] The insufficient scale was particularly troubling given the declining E.U. auto market at a time when Tesla, Google and Uber were making progress on electric and self-driving cars. Fiat Chrysler could really use the expertise at Renault and Nissan on electric cars. I'm not sure, however, that a merger was the optimal route forward.

As with nearly everything, potential downsides existed. First, the merger would dilute the shares that the state of France already had in Renault from being its largest stockholder. Second, political leaders in that state as well as Italy would doubtless “fight to preserve as many jobs” in the respective states as possible.[4] In its analysis, however, The New York Times claimed at the time that it would be difficult for the merged company to avoid job cuts, given that the companies’ respective companies were operating below capacity.

So perhaps the anticipated savings of €5 million were optimistic, which raises the question: why not an alliance to fund a shared R&D center where work would be done on high cost, future revenue electrification and self-driving cars? Pushing for a full-blown merger would risk clashing corporate cultures. Also, the inevitable politics as duplicate management positions are eliminated would not be cost-free. Furthermore, the alliance between Renault and Nissan, already strained, could suffer or break apart in the event of a merger but not another alliance.

The basic problem was not enough scale (i.e., revenue) in either company to finance the heavy cost of R&D without compensating revenue in the short or medium term. When the gains from other efficiencies are not the main point of a merger, an alliance or partnership focused on the main problem may have been a better fit.

The problem of scale in terms of having enough money to finance the high-tech research need not incur the disproportional costs that come with increased organizational size and complexity. The costs of integration organizationally, for example, increase disproportionately with organizational size (and complexity).[5] Empire-building, a political as much as economic propensity at the upper level of organizations, can give rise to optimistic forecasts of savings from various efficiencies from mergers while the financial downsides are minimized. We could note, for example, the skepticism regarding Fiat Chrysler’s claim that no jobs would be lost and no factories would be closed. If the urgency for the merger was due to the advances by Tesla, etc., then perhaps a better proposal would have been delimited by that main problem rather than blown up to the form of a complete merger.

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[1] Jack Ewing et al, “Renault Considering Fiat’s Offer to Merge Into a New Auto Giant,” The New York Times, May 27, 2019

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] James D. Thompson, Organizations in Action: Social Science Bases of Administrative Theory (London: Routledge, 2003).

Auto vs. Oil Industries on Emission Standards: Putting a Part Above the Whole

When a company or an entire industry skips over the good of the whole—the public good—in lobbying for legislation that only reflects the needs or desires of individuals (qua consumers only), the society itself (and even the Earth) is slighted and thus more at risk. For the good of the whole is more than just the cumulative needs and desires of individuals in part because the latter do not take into account the wider effects of their choices. When an individual company or industry takes this point into account and rebuffs favorable legislative proposals because they would do too much damage to society and/or the planet, social responsibility is at hand. Companies or industries that do not are thus irresponsible from the standpoint of the whole, which, through government, is justified in keeping an eye on them (especially in making transparent their efforts to influence legislation and regulation. The American auto and oil industries can be distinguished in this regard.

“When the Trump administration laid out a plan” in 2018 that would have eventually allowed “cars to emit more pollution, automakers, the obvious winners from the proposal, balked. The changes, they said, went too far even for them.”[1] Too far even for the obvious winners—an amazing statement, considering that companies and industries generally try to get as much as they can in terms of deregulation and favorable laws.

Another industry, however, fueled by the efforts of Marathon Petroleum, “was pushing for the changes all along.”[2] The campaign’s main argument “for significantly easing fuel efficiency standards” was “that the United States [was] so awash in oil” that energy conservation need no longer be a worry.[3] This statement blatantly misses the point that the standards that were in place then were also to reduce emissions of CO2 from what they would otherwise have been from entering the Earth’s atmosphere.

Interestingly, the American oil industry must have missed the memo on the continuing increases in the emissions.

In fact, 2017 saw a record amount of emissions added to the atmosphere; the Paris Accord in 2015 was already proving to have been a failure.  Issued in early October, 2018, a “landmark report” from the UN’s Intergovernmental Panel on Climate Change “paints a far more dire picture of the immediate consequences of climate change than previously thought.”[4] The report states that if “greenhouse gas emissions continue at the current rate, the atmosphere will warm up by as much as 2.7 degrees Fahrenheit (1.5 degrees Celsius) above preindustrial levels by 2040, inundating coastlines and intensifying droughts and poverty.”[5] This was the context in which the oil industry was running “a stealth campaign to roll back car emissions standards.”[6]

The industry’s rationale reduced everything to the needs and desires of individual customers with no consideration of the impact on even them, not to mention humanity—including possibly its very survival. “With oil scarcity no longer a concern,” Americans should be given a “choice in vehicles that best fit their needs,” read a draft of a letter that Marathon helped to circulate to members of Congress over the summer. Official correspondence later sent to regulators by more than a dozen lawmakers included phrases or sentences from the industry talking points, and the Trump administration’s proposed rules incorporate similar logic.”[7] Of course, that a “quarter of the world’s oil is used to power cars, and less-thirsty vehicles mean lower gasoline sales” was not missed on either Marathon or its industry as a whole.[8] But the notion of a whole apparently stopped at the industry level; externalities beyond that, even one bearing on the future of mankind, were apparently of no concern.

Marathon Petroleum even “teamed up with the American Legislative Exchange Council, a secret policy group financed by corporations as well as the Koch network, to draft legislation for states supporting the industry’s position. [The] proposed resolution, dated Sept. 18, describes [the then] current fuel-efficiency rules as ‘a relic of a disproven narrative of resource scarcity’ and [urges that ‘unelected bureaucrats’ shouldn’t dictate the cars Americans drive.”[9] The resolution’s language doubtlessly included the council’s talking points, which, in staying on the “resource scarcity” rationale for standards, neglect the obvious link between emissions and climate change. Furthermore, the smack on “unelected bureaucrats” demonstrates no regard for government as standing for the interests of the whole when externalities from cumulative individual decisions are too much from the perspective of the whole. To be sure, with industries swaying legislators and regulators in democracies, laws and regulations can indeed benefit a part at the expense of the whole, but this deplorable flaw does not negate the need to protect the whole from parts from exploiting conflicts of interest. Unlike the auto industry, the oil industry sought to exploit its conflict of interest by putting its narrow interest ahead of that of the whole where the whole supposed to be paramount—in the halls of government.

I suggest, therefore, that heightened scrutiny is warranted where a company or industry (or the business sector—still but a part of the whole) seeks to influence lawmakers, regulators, or the general public in line with the private (profit) interest. This is especially needed in a culture that is generally in line with its business sector’s values. People and government officials alike in such a culture (such as that of the U.S.A.) find it difficult to realize the need to see that such conflicts of interest are not exploited. In fact, in my book, Institutional Conflicts of Interest, I argue that a conflict of interest is inherently unethical even if it is not exploited. A few other scholars on the subject argue in contrast that if a conflict of interest is not exploited, no harm is involved, but I contend that another reason exists why arrangements or situations that include conflicts of interest are unethical. I actually met one of those scholars on the Loyola campus in Chicago, but once in his office, I found he only wanted to talk about Obama. So much for scholarly exchanges.

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1. Hiroko Tabuchi, “The Oil Industry’s Covert Campaign to Rewrite American Car Emissions Rules,” The New York Times, December 13, 2018.

2. Ibid.

3. Ibid.

4. Coral Davenport, “Major Climate Report Describes a Strong Risk of Crisis as Early as 2040,” The New York Times, October 7, 2018.

5. Ibid.

6. Hiroko Tabuchi, “The Oil Industry’s Covert Campaign to Rewrite American Car Emissions Rules,” The New York Times, December 13, 2018.

7. Ibid.

8. Ibid.

9. Ibid.

The U.S. Goes after Executives at Volkswagen: A Deterrent?

Oliver Schmidt, a Volkswagen executive who had been head of the company’s environmental and engineering center in Michigan, pleaded guilty on August 4, 2017 to two federal charges in the United States: conspiracy to defraud the federal government and violating the Clean Air Act. He “admitted conspiring with other Volkswagen employees to mislead and defraud the United States in 2015 by failing to disclose that thousands of diesel cars were rigged to evade detection of excess emissions levels. He also admitted filing fraudulent emissions reports to regulators.”[1] He faced possible fines and time in prison. James Liang, another of the company’s executives who had been charged, had already pleaded guilty to charges of conspiracy and violating the Clean Air Act. The other executives charged were in the E.U. state of Germany, which does not extradite its residents. Given the power of the auto industry in that state, such accountability applied to executives for the same fraud in the E.U. may have been too difficult to achieve. Nevertheless, for the sake of business ethics alone, prosecuting executives personally rather than just companies is in general important as a deterrent.

Prior to Schmidt’s admission of guilt, Volkswagen had agreed to pay $4.3 billion in civil and criminal penalties, which in turn were part of $22 billion in settlements and fines in connection with “the cheating scandal and the sale of vehicles that emit harmful levels of pollution.”[2] Yet with revenues of $228.5 billion in 2016, the question of whether 10% of one year’s revenues for a company that had nearly $431 billion in assets at the end of that year could reasonably be expected to act as a deterrent.[3] I submit that prison time for executives is the way to get not only their attention, but that of the company itself, including its current and future management personnel. As wealthy as executives typically are, not even fining them would be of a sufficient deterrent; their quality of life must be significantly thwarted for a significant amount of time for the message to get through. Given the massive lapses in holding Wall Street executives accountable for their role in producing and/or selling sub-prime mortgage-based bonds and the high probability that resumed excessive risk-taking held secret even from clients and stockholders could trigger yet another financial crisis, the U.S. Justice Department was on a prudent path in going after the executives at Volkswagen rather than only the legal person (i.e., the company itself). Yet a pattern of prosecuting executives, even of financial institutions based in the U.S., would be necessary for the deterrent to work going forward.

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[1] Bill Vlasic, “Volkswagen Executive Pleads Guilty in Diesel Emissions Case,” The New York Times, August 4, 2017.

[2] Ibid.

[3] Volkswagen’s 2016 financial statements. 

Unethical Business at Volkswagen: Loans Cut off

As R&D was at a premium in car companies reorienting to electric and even driverless cars, Volkswagen could ill-afford the suspension of the European Investment Bank’s low-cost financing in 2017. The company “was barred from receiving European Union research funding over allegations it misused a previous loan to cheat on emissions” by programming “11 million cars to fool regulators.”[1] At issue were the company’s “use of so-called defect devices, software that caused pollution controls in diesel motors to work properly only when the engine computer detected that an official emissions test was underway.”[2] Accordingly, the European Anti-Fraud Office concluded that the company had misled authorities about how €400 million ($472 million) was used ostensibly to develop engines to be more fuel efficient and thus pollute less. I contend that the company’s reply was worse than none.
In spite of the fact that the company had pleaded guilty to having installed defect devices in cars in the U.S., the company’s management in the E.U. issued the following statement: “All funds received by Volkswagen from the European Union were used for the designated purposes”[3] Such boiler-plate language that leans on perfection as if it were a daily phenomenon actually makes a culprit look more guilty (and oblivious). Why is it that managers can be so utterly tone-deaf in replying in a defensive way to an accusation against their respective companies? I suspect that going on the advice of PR people is not the best plan, for such people are oriented to making someone or something look good. Meanwhile, a corporate legal department is also narrowly concerned; in this case, the concern is to minimize or obviate entirely any legal liability. The result is a company that doesn’t look very good because efforts to evade taking responsibility for oneself never do. Better not to issue a statement than to go down the road most travelled. The challenge for managers in formulating a company statement is to take responsibility and demonstrate contrition as in accepting the consequences, such as the suspension of low-cost loans in Volkswagen’s case, while not admitting to legal liability that the company genuinely disputes. A statement thus may not be available in short order, but even a delayed response is better than boiler-plate obviating for a company’s reputation.


A related book:  Cases of Unethical Business, can be obtained in print or as an ebook at Amazon.com.

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[1] Jack Ewing, “European Bank Cuts Funds to VW Because of Emissions Fraud,” The New York Times, August 1, 2017.

[2] Ibid.

[3] Ibid.

Disentangling a Worsening Trade Deficit: Sector-Specific Industrial and Macro Economic Policy

he U.S. trade deficit rose 9.6% in January, 2017, to the highest level since 2012. The gap of $48.5 billion of exports exceeding imports looks daunting, yet the story is more complex at the sector level.[1] According to Neil Irwin of The New York Times, “What really matters is not whether the trade deficit is rising or falling. What matters is why?”[2] Distinguishing macro factors such as a strengthening dollar from sectoral strengths and weaknesses is thus necessary.

 The Port of Oakland. (source: Jim Wilson/NYT)

In the automotive sector, a $1.3 billion increase in exports corresponds to a $900 million increase in imports—essentially a draw. The $2.1 billion more in exports of industrial supplies is favorable, suggesting that that sector is doing well, but exports of civilian aircraft fell by $611 million, and other high-tech capital goods were also down, while imports of consumer goods—notably cell phones—increased by $2.4 billion. Boeing may simply have had a bad month, though it is also possible that Airbus had been out-competing its American competitor. The numbers on electronics add to the general perception that the U.S. is not competitive in such manufacturing. Industrial policy could address the possibility that automation and tax incentives (and penalties on American companies producing abroad only to import the finished goods back to the domestic market) could rectify this weakness in the American economy. 

Meanwhile, the balance of trade in services worsened by $5.3 billion. The fact that the money that foreign travelers spend in the U.S. on hotels and restaurants counts as exports suggests that a strengthening dollar could have been in play.[3] The Federal Reserve’s monetary policy was thus in play, for rising interest rates mean a strengthening of the dollar. Industrial policy may thus be less relevant here.

“A big piece in the rise in imports was crude oil and other petroleum products. They were up by a combined $2.2 billion.”[4] Exports also increased, by $1.2 billion, so this sector obviously contributed significantly to the overall trade deficit. To be sure, an increase in the price of oil favored producers, but this matter is dwarfed by the strategic national-security goal of self-sufficiency on fossil fuels. In terms of industrial policy, an expansion of domestic sources of oil and refining capacity may have been advisable at the time—not so carbon emissions would increase, but, rather, so imports of oil could drop.

In short, analyzing changes in a trade deficit requires distinguishing sectors, and, moreover, discerning where industrial policy recommendations are in order from cases in which macro political economic policy is at issue. Ideally, sector-specific industrial policies and macro policies are “on the same page.”

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[1] Neil Irwin, “The Huge January Trade Deficit Shows Trump’s Hard Job Ahead,” The New York Times, March 7, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

On the Business Ethics and Technology of Self-Driving Cars at Tesla

During the summer of 2016, Tesla was under fire societally with charges regarding the technology and ethics. Both of these issues can be put into a wider perspective in the company’s favor. Put another way, both technological and ethical analyses can be enhanced by putting the specific problems within a larger perspective—even in terms of time.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.